Question

E2-7 (L05,6) (Assumptions, Principles, and Constraint) Presented below are a number of operational guidelines and practices that have developed over time.

Instructions

Select the assumption, principle, or constraint that most appropriately justifies these procedures and practices. (Do not use qualitative characteristics.)

1. Fair value changes are not recognized in the accounting records.
2. Financial information is presented so that investors will not be misled.
3. Intangible assets are amortized over periods benefited.
4. Agricultural companies use fair value for purposes of valuing crops.
5. Each enterprise is kept as a unit distinct from its owner or owners.
6. All significant post-balance-sheet events are disclosed.
7. Revenue is recorded when the product is delivered.
8. All important aspects of bond indentures are presented in financial statements.
9. Rationale for accrual accounting.
10. The use of consolidated statements is justified.
11. Reporting must be done at defined time intervals.
12. An allowance for doubtful accounts is established.
13. Goodwill is recorded only at time of purchase.
14. A company charges its sales commission costs to expense

Short answer

Under the study of financial reporting, theconceptual framework hasassumptions, principles, and constraintsas the three basic criteria forrecognition and measurement.

Step-by-step solution

Meaning of conceptual framework

Theconceptual frameworkis the source of information that guides the members in understanding the main purpose behind the specific accounting standard.

Explanation for Part (a)

• TheMeasurement principle will be the correct answer. Fair value changes are not recognized in the accounting records to avoid subjectivity in the information being presented to the users.

Explanation for Part (b)

• Thefull disclosure principle will be the correct answer. Financial information will be presented to the users so that the investors can make better decisions and will not be misled.

Explanation for Part (c)

• Theexpense recognition principle will be the correct answer. Amortization of intangible assets is recorded as an expense over the period befitted; this helps to match the expenses incurred with the revenue generated.

Explanation for Part (d)

• Themeasurement principle will be the correct answer. Agricultural companies use fair value to value crops because the price of crops is readily available in the market.

Explanation for Part (e)

• Theeconomic entity assumption will be the correct answer since each enterprise is kept as a unit separate from its owner(s) for establishing accountability.

Explanation for Part (f)

• Thefull disclosure principle will be the correct answer. Under which all significant post-balance-sheet events are disclosed to ensure a fair presentation.

Explanation for Part (g)

• Therevenue recognition principlewill be the correct answer. Revenue is recognized when the product is delivered, i.e., when the obligation to make sales is satisfied.

Explanation for Part (h)

• Thefull disclosure principlewill be the correct answer. All important aspects of bond indentures are presented in financial statements in order to ensure full disclosure of information.

Explanation for Part (i)

• Theexpense recognition principle will be the correct answer. The rationale for accrual accounting is that all expenses should be recorded on an accrual basis so that the prudent investor is not misled.

Explanation for Part (j)

• Theeconomic entity assumption will be the correct answer. Consolidated financial statements are appropriate and used as justifying since the entire entity is considered a separate unit.

Explanation for Part (k)

• Theperiodicity assumption will be the correct answer. Reporting is to be done at defined time intervals so the business entity can compare the results of one period with those of another.

Explanation for Part (l)

• The expense recognitionprinciple will be the correct answer. An allowance for doubtful accounts is established to provide a fair estimation of realizable value from the debtors.

Explanation for Part (m)

• Themeasurement principle will be the correct answer. Goodwill is recorded only at the time of purchase because estimating the fair value of self-generated goodwill is subjective.

Explanation for Part (n)

• The expense recognition principle will be the correct answer. The sales commission cost is an expense because it is necessary to make the required sales.